Income Tax: Capital Gains: Deceased Estates: Separate Assets

Does a taxpayer acquire two separate assets for the purposes of Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) when they inherit a building constructed after 20 September 1985 on land acquired prior to this date?

Yes, the taxpayer acquires two separate assets for the purposes of Part 3-1 and 3-3 of ITAA 1997 at the date of the deceased's death, but they are merged into a single asset immediately after acquisition.

The taxpayer acquired a property from a deceased estate.

The deceased acquired the land (2 hectares) before 20 September 1985.

The deceased constructed a building on the land after 20 September 1985.

The taxpayer subsequently sold the property.

Subsection 108-55(2) of the ITAA 1997 treats a building or structure that is constructed on pre-CGT land as a separate CGT asset, provided the contract for construction was entered into after that day or, if there is no contract, construction commenced after that day. In this case, the deceased acquired the land before 20 September 1985 and constructed a building on that land after that date. Consequently, the land and building are treated as separate CGT assets in the hands of the deceased.

Subsection 128-15(2) of the ITAA 1997 deems the beneficiary to have acquired the land and building at the date of the deceased's death. According to the table in subsection 128-15(4) of the ITAA 1997, the cost base of the land will be its market value at the date of the deceased's death, and the cost base of the building will be its cost base in the hands of the deceased at the date of the deceased's death.

However, subsection 108-55(2) of the ITAA 1997 cannot apply when the beneficiary disposes of the land and building. This is because the beneficiary is deemed to have acquired the land and building at the date of the deceased's death (that is, after 20 September 1985) and for CGT purposes, the assets acquired by the beneficiary are merged into a single CGT asset immediately after acquisition. Under subsection 112-25(4) of the ITAA 1997, each element of the cost base of the merged asset will be the sum of the corresponding elements of the cost base of each original asset. Therefore, the first element of the cost base of the single asset will be the sum of the market value of the land at the date of the deceased's death and the cost base of the building in the hands of the deceased at the date of the deceased's death.